German Manufacturing Hits 4-Month Low, Services Sector Shows Slight Resilience

Persistent Economic Struggles in Germany

In February, Germany’s economic situation continued to face significant challenges, as revealed by the latest HCOB ‘flash’ PMI® survey compiled by S&P Global. This period marked the eighth consecutive month of contraction, with the HCOB Flash Germany Composite PMI Output Index indicating an accelerated rate of economic downturn.

Manufacturing Sector Under Pressure

The manufacturing sector experienced a notable downturn, with the HCOB Flash Germany Manufacturing PMI reaching a four-month low of 42.3, falling well below the expected 46.1. This decline was characterized by a sharp decrease in manufacturing output and an intensified contraction rate, highlighting the sector’s increasing difficulties.

Service Sector Shows Resilience

Contrasting with manufacturing, the service sector displayed a marginal improvement. The HCOB Flash Germany Services PMI Business Activity Index rose to a two-month high of 48.2, slightly above the forecasted figure. However, this still pointed to a modest contraction in the sector. Employment levels showed stability, reflecting a cautiously optimistic outlook among firms.

Rising Business Costs and Supply Chain Developments

The survey also shed light on a significant rise in business costs, the most substantial in ten months, primarily driven by increased wage pressures in the service sector. In contrast, manufacturing prices continued to decline due to reduced demand. Supply chain issues, including disruptions in the Red Sea, had a limited effect, with improvements in delivery times and a preference for lower stock levels among firms.

New Business and Export Challenges

Both the manufacturing and service sectors saw a rapid decline in new business, with the rate of decrease being particularly sharp in manufacturing. Export business also saw a broad-based reduction, adding to the economic challenges.

Labor Market Resilience and Business Expectations

Despite fewer new orders, the labor market demonstrated resilience, with only a slight decrease in employment. The service sector, in particular, saw significant hiring, contrasting with more considerable job losses in manufacturing. Business expectations improved, driven by optimism in the service sector, although manufacturing sentiment worsened.

Inflation and Pricing Trends

Input cost inflation continued to rise steadily across Germany, with the service sector facing increased labor and energy costs. Meanwhile, manufacturing purchase prices saw a slower rate of decline, indicating a slight easing in price reductions.

Expert Commentary on Economic Outlook

Dr. Tariq Kamal Chaudhry, Economist at Hamburg Commercial Bank, provided insights on the PMI data, emphasizing the ongoing economic pressures in Germany. He noted the severe downturn in manufacturing and the challenges in both domestic and international new orders. While the service sector offered some positive aspects, the overall economic outlook for 2024 remains cautious, with structural challenges and demographic shifts posing further obstacles.